Dan Aloni's blog

Here’s an example for a company that most investors would very much appreciate. Agree Realty Corporation (ADC, SEC filings) owns and operates over 3.5 million square foot of commercial real-estate in the United States of America. There are several reasons why its stock should appear attractive for investors.

• The consistent 15 years history of paying dividends – about $2 every year. If an investor bought the stock in 1994 and reinvested the dividend up until now, he or she would have made about 10 times of the original investment. The payout ratio is normal – about 1.05, meaning that the dividend matches the companies earnings. Assuring that as long as these earnings are sustained and the dividend distribution policy remains, this hefty dividend payout will continue.
• The company’s revenue from its operations (mainly renting) in 2009 amounted to 15% of its asset value meaning its a very efficient REIT. Of that revenue, 7% remains as distributable net income.
• Leverage is currently only 36% of the balance.
• Ownership by management and their relatives (Agree family) is large – over 5%.

However before we go and buy this company, one needs to look at the prospects of commercial real estate in the United States. The ICSC website tells us there were 105,000 shopping centers in the United States at the end of 2009. There are numerous blogs on the Internet that are suggesting commercial real estate in the US will be entering a rough period due to de-leveraging and downsizing, much like the state in which the housing market is currently in. However, they are saying that over some time (since 2007) and so far businesses are booming.

So far I’ve mentioned nothing about the stock. At the current price of $28.49 (November 26, 2010), the data is as follows:

• Book value at 62% of share price.
• Leverage is at 36% of the balance.
• Annual dividend distribution of 7.2%.
• Balance at 99% of market cap.

Historically the company trades above its book value. Only during recessions such as the one in 2001 and the other in 2008 the company stock went close or below its book value. I’ve gathered the relevant information from 1996 and until 2009, as can be seen in the table below:

Personally I prefer to buy REITs close to their book value, which means I would have only bought this stock during recessions. An interesting story about ADC is that back in 2008 this stock price went down to $8 and the company refused a take-over at that price. Currently, 62% above book value is the historical average for this stock, which means that similarly to the rest of the stock market, it hasn’t decided between recession or a new bubble. I’d recommend to keep it, sell it if it reaches 100% above book value and buy it again if it goes back to book value.

Disclosure and Disclaimer: I am the writer of this article and I own shares of ADC since July 2009. Information on this website should not be considered to be investment advice. It represents the musings of one person and should only be used for entertainment. Moreover, any information found on this website should not be assumed to be correct. It is possible that there may be some errors. Above all, do your own research.

Tags: adc, investing